Understanding the grievances against trade

February 08, 2018

Agreement reached on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

More than five years since joining the Trans-Pacific Partnership trade negotiations, Canada, along with ten other countries (including Japan but noticeably excluding the US) reached an agreement and are expected to sign the revised CPTPP in March 2018. The agreement marks a significant breakthrough in Canadian trade relations at a time when a renegotiated North American Free Trade Agreement (NAFTA) remains elusive after six rounds of negotiations.

Why, then, is there significant opposition to this deal, particularly from industry associations, unions, and labour organizations? Do certain segments of Canadians have reason to be concerned for their welfare as a result of increased openness in trade? If so, are there public policy mechanisms in place to ensure that the benefits from trade are inclusive?

Canadian industries are polarized over agreement

Beef and pork producers are largely pleased with the CPTPP deal ­– President of the Canadian Meat Council, Chris White, regards the deal to be a “generational economic opportunity.” The mining sector has equally welcomed the announcement, highlighting the benefits from increased access to new markets and “greater certainty, transparency, and foreign investment protection.”

However, the reaction from the automotive industry has been mixed. The Canadian Vehicle Manufacturers’ Association, the Automotive Parts Manufacturers’ Association, and Unifor, the largest private-sector union in Canada, among others, object to the CPTPP because of the potential adverse impacts on the sector. Others such as Canada’s Japan Automobile Manufacturers Association and auto parts manufacturer Linamar believe the agreement will be beneficial for the auto sector.

The economics of trade

International trade theory is helpful in explaining why the CPTPP is so divisive, and why there will always be opposition to trade agreements. According to traditional trade models, the effects of loosening trade barriers between two countries depends on the relative abundance of factors used for production (such as machinery, land, and low or high-skilled labour). After trade opens between two economies, the country with a relative abundance in a particular factor will export the good that uses this input intensively while its trading partner increases imports of the same good. As a result, the model predicts that CPTPP member countries like Malaysia and Vietnam, which are well endowed with labour used in automobile and parts production, will increase their output and exports of these goods while imports into Canada will rise. Ultimately, prices of automotive products will drop in Canada along with wages for those employed in these industries. Industries in Canada producing goods that require a high intensity of highly-skilled labour or land (in the case of food products like beef and pork) will, in turn, increase their exports as Canada is relatively better endowed with these inputs of production.

Additionally, depending on the final terms on rules-of-origin in the updated deal, only about 45 percent of value content in a product could be required to be sourced from CPTPP members (between 30 to 45 percent for motor vehicle parts). This would allow for more inputs in vehicles to be sourced from labour rich countries like China. It is no surprise, then, that members in the auto sector are pushing back.

More recent trade models also predict losses for the least productive firms within a particular exporting industry. Only highly productive firms can export to new markets, as they are able to overcome the fixed costs associated with trade. As a result, productive firms expand and outcompete low productivity firms who are then forced to contract or close down. This explains why Linda Hasenfratz, CEO of Linamar, who champions their factories in Ontario as the “most productive globally” sees the new trading agreement more as an opportunity than a threat.

Benefits of trade outweigh the costs

It’s possible that we may be forgetting why Canada needs CPTPP as groups that have the most to lose are most vocally opposed to the deal. Kevin Carmichael emphasizes that Canada stands to gain from more trade agreements by allowing the most productive and innovative companies to thrive and lowering prices for consumers. Canada is too dependent on a few highly productive companies to export and on the US for trade. Canada’s experience with trade policy has been successful over the long-run. The literature behind the effects of the Canada-US FTA (Free Trade Agreement) in 1989 and NAFTA (which superseded the FTA in 1994) illustrates that these agreements increased productivity and had a net-positive effect on welfare.

Losers not adequately compensated

Still, there is sufficient evidence that the short-run losses from trade are significant and concentrated on certain industries and workers. Twelve percent of workers in low productivity firms in the most-impacted, import-competing group of industries lost their jobs as a result of the Canada-US FTA. While not a result of a free-trade agreement per se, increasing exposure to exports from China have had similar consequences. The rise of China as an exporting super-power (‘China Shock’) is estimated to have resulted in a net loss of 105,000 manufacturing jobs in Canada between 2001 and 2011 as a direct result of import competition from China –equivalent to 20.7 percent of the total decline in manufacturing over this period.

Academics, economists, and policy makers alike are aware that the benefits of trade are in fact not shared by all citizens. In his criticism of TPP, Joseph Stiglitz noted that even though the widely accepted economic theory behind trade is clear about the distributional effects of lowering trade barriers, the models do not suggest that the winners “would compensate the losers. That’s a political process.” The CPTPP agreement will likely increase overall welfare and raise productivity, but also produce significant negative outcomes for some. There is little to suggest that adequate policies have been put into place to help those left behind.

Helping workers adjust to labour market shocks

Programs such as Trade Adjustment Assistance in the US and the European Globalization Adjustment Fund aim to help trade-affected workers through job search and relocation allowance, training, and temporary income replacement. However, there is no clear conclusive evidence that they have been effective. Instead, Lysenko and Schwartz recommend an updated set of general labour market programs and policies that address all structural changes in the economy, including technological advancements in the workplace. This should include revamping the Employment Insurance program at the federal level as well as provincially funded training programs such as Employment Service and Second Career in Ontario.

In his address at the World Economic Forum in Davos, Prime Minister Trudeau proudly announced the CPTPP agreement, adding that “trade helps strengthen the middle class, but for it to work we must ensure that the benefits are shared with all our citizens, not just the few.” A serious commitment to this cause will have to go beyond merely hoping that those susceptible to the effects of trade will somehow be compensated. It starts with re-examining and modernizing local labour market policies to accommodate those most vulnerable.